African stocks fail to shine

April 11, 2012

Okay, most emerging stock markets have had a hard time in the last few weeks, but African stocks have failed to shine all year, with lack of liquidity and political uncertainty to blame.

The MSCI global emerging stocks index has fallen six percent in the past six weeks on wobbles over the Chinese and U.S. economies and the euro zone debt crisis.

The index is still up 11 percent on the year though, while MSCI’s Africa index has risen only 6.5 percent. The Africa index underperformed last year too, plunging more than 30 percent, compared with  a 20 percent drop in emerging stocks.

African markets have not yet recovered from the shock of hedge fund exits during the 2008/09 financial crisis.

According to Jonathan Stichbury, md of fund manager PineBridge’s operations in Africa:

We had hot money coming into Africa in 2007/08…since then, few have gone back in, except to play around with the top names. Last year was not a great year for African (listed equity returns).

Stichbury says the cost of trading on African exchanges — at up to 3 percent of the transaction to get in, and 3 percent to get out, is deterring investors. Currencies are also volatile in the region, and there is caution too about political stability.

The biggest top-down risk is currency. We have to look at the currency, we have to look at political risk, we have to look at liquidity.

For Murat Ulgen, chief economist for central and eastern Europe and sub-Saharan Africa at HSBC, there has been some improvement in the political outlook in Africa, with smooth Nigerian elections last year and power-sharing in Kenya following post-election violence four years ago. But Africa needs more investment:

Sub-Saharan Africa is the region that has most to catch up…It has a significant infrastructure deficit, the region receives the least from FDI (foreign direct investment). A reform-minded approach should help this region to attract FDI.    They have a massive demographic advantage — in the next 40 years, half of the world’s population growth will come from Africa.


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